Grantor Retained Annuity Trusts (GRATs)
A grantor retained annuity trust (GRAT) is an estate planning tool that allows a person to pass the future appreciation of an asset to the next generation with little or no gift tax consequences. The trust is set up as an annuity where the donor receives an annual payment for a fixed number of years. At the end of the term, the remaining value of the trust is passed on to the beneficiaries or a trust for the beneficiaries. Low-interest rates make GRATs especially attractive because the required annuity payments are dependent upon the IRS’s prescribed section 7520 interest rate. To the extent that transferred assets appreciate at a rate higher than the IRS’s prescribed rate, excess appreciation passes tax-free to the beneficiaries.